by Hazwan Lee bin Haris Lee (31 October 2021)
Judicial management is a corporate rescue mechanism whereby upon an application to the Court, the Court shall appoint an independent insolvency practitioner (normally an insolvency practitioner proposed by the applicant) to act as the judicial manager of the company in question. The judicial manager shall attempt to rehabilitate the company throughout the period of the judicial management order. During this time, the company will be shielded from various court proceedings against it to ensure that it has the best possible chance of being successfully rehabilitated.
The application of a Judicial Management Order is governed by Section 404 of the Companies Act 2016. Upon the filing of the application, the company in question would be placed under an automatic moratorium by virtue of Section 410 of the Companies Act 2016. The moratorium stays any court proceeding against the company as well as putting a stop to any company resolution being passed and any enforcement of a charge over the company’s property. Should any party intend to continue proceedings against the company in question they would need leave from the Court to continue or commence their respective proceedings.
The test for Judicial management is set out in paragraph Section 405 of the Companies Act 2016. There are 2 limbs of this test. The first limb is set out in Section 405(1)(a) which provides that the Court must be satisfied that the company is or will be unable to pay its debts. Under the first limb, the High Court in Leadmont Development Sdn Bhd v Infra Segi Sdn Bhd and Another Suit  8 MLJ 473 observed that the word ‘satisfied’ in Section 405(1)(a) indicates that a higher threshold of persuasion needs to be met, as compared to just ‘consider’.
This would unlikely be an issue if the Applicant is the company in question as they would likely have access to its own financial records and statements. However, it may be more difficult to meet this test if the Applicant is a creditor of the Company as a creditor would not have the complete financial snapshot of the Company. In these cases, an ongoing winding up petition filed against the Company by the Applicant may be considered as prima facie evidence of the inability of the Company to pay its debts. Alternatively, making an application for an Interim Judicial Management Order may also prove useful in these scenarios. If the application for an Interim Judicial Management Order is granted, further examination of the financial records of the Company may be conducted which will provide the necessary information to satisfy this limb.
If the first limb is satisfied, the applicant would need to satisfy the second limb which is set out in Section 405(1)(b). Here it provides that the order shall be granted if it is likely to achieve one or more the following purposes:
a) the survival of the company;
b) the approval under Section 366 of a compromise or arrangement between the company and any such persons as are mentioned in that section; and
c) a more advantageous realization of the company’s assets would be effected than on a winding up.
The use of the word ‘likely’ would mean that the Applicant has to demonstrate on a balance of probabilities that it is ‘more probable than not’ that this criterion will be achieved. This is a lower threshold to meet compared to the 1st limb.
To meet the criterion of the 2nd limb, the Applicant would need to prepare a proposal for the Company to achieve any or all of the purposes in 405(1)(b) which ought to be supported by evidence. The Courts at this stage may even expect an expert report by the proposed judicial manager supporting the application for judicial management in addition to supporting the proposed plan by the Applicant. In Re Biaxis (M) Sdn Bhd  MLJU 1188, the Applicant, despite being the company itself and having appointed an insolvency practitioner to advise them prior to the application, did not provide any expert evidence with regards to their proposal for the company. The Court there ultimately held that the Applicant’s proposal for rehabilitation were lacking details and credibility, falling short of the threshold.
The Courts are however, cognizant of the fact that the evidence available by an applicant of a judicial management order depends on whether they applying as the company itself or as a creditor of a company. Being a creditor of the company, the applicant would unlikely have access to the same degree of financial information compared to if the applicant was the company itself. Often times, more would be expected if applicant was the company itself and had access to its financial information.
However, these are not the only elements that the Court will take into account. The Court will also refuse to make a judicial management order if the applicant fails to makes a material disclosure to the Court or if the Court finds that the Applicant has acted in bad faith in making the application.
Despite this, under Section 409 of the Companies Act 2016 the Court must dismiss the application for Judicial Management if a secured creditor opposes the application. There is an exception to this which is found in Section 405(5). Here it provides that the Court may grant a judicial management order, overriding all checks and balances, if the Court considers that it is in the public interest to grant the judicial management order. In Re Biaxis (M) Sdn Bhd  MLJU 1188, the Penang High Court explained the exceptional nature of this provision, providing a hypothetical example where if the company applying for judicial management is the only company that possesses the vaccine for the Covid-19 virus, only then would it fall within Section 405(5).
Judicial Management Order
The judicial management order would be in force for a period of 6 months from the date of the order. This period can be further extended for another 6 months on the application of the appointed judicial manager. This is often done if more time is required for the judicial manager to achieve one or more of the purposes set out in Section 405(1)(b). In addition to the terms of the automatic moratorium set out in Section 410, once the judicial management order has been granted, additional terms will be included in the moratorium which includes that no receiver shall be appointed over the company, any receiver previously appointed shall be dismissed, any winding up petitions against the company shall be dismissed and the shares of the company will be effectively frozen unless leave of the Court is obtained.
During the period of the judicial management order, the powers and duties of the directors of the company shall be vested in the judicial manager. This enables the judicial manager to prepare a statement of proposal for achieving one or more of the purposes set out in 405(1)(b). A judicial manager would have only 60 days from the date of the judicial management order (unless the Court orders otherwise) to prepare the statement of proposal and present it before the company’s creditors for their approval. The judicial manager would need 75% of the total value of creditors to approve the statement of proposal. Failing which, the Court may discharge the judicial management order or make any other consequential order it deems fit. If the proposal is approved, the judicial manager would then be required to manage the affairs business and property of the company in accordance with the approved proposal.
Judicial management is certainly a viable option for struggling companies to consider as it offers a last-ditch attempt for the company to be rehabilitated and during which the company will not be threatened by litigation and execution proceedings from its creditors. The creditors of struggling companies may also consider judicial management as a successful judicial management would likely mean that a creditor would be more likely to receive a higher return compared to if the company was wound up.
However, a great deal of preparation is required before making an application for a judicial management order. The advice of an insolvency practitioner on a proposal for the rehabilitation of the company may prove invaluable early on. Additionally, meeting and negotiating with the creditors of the company to obtain their support for the application would not only ease the application process but would improve the likelihood of a successful judicial management.
Note: This article does not constitute and should not be relied on or treated as legal advice on or with respect to any particular case. The facts and circumstances of each and every case will differ and therefore will require specific legal advice. Feel free to contact us for complimentary legal consultation.